AbbVie Begins Trading on the NYSE and Should Prove Valuable in the New Year

AbbVie (NYSE:ABBV), the R&D-focused spinoff of Abbot Laboratories (NYSE:ABT), began its first day of trading on the NYSE on Wednesday, and we expect shares of the biopharmaceutical company to perform well over the course of 2013 given the success of recent pharmaceutical spinoffs and the growth of its lead products. Take Zimmer Holdings (NYSE:ZMH) and Medco for instance, both of which proved homeruns following their splits from Bristol-Myers Squibb (NYSE:BMY) and Merck (NYSE:MRK), suggesting that investors will be interested in owning ABBV as well. Until late-stage products begin to prove out, analysts and investors will be focused primarily on lead-product Humira’s growth trajectory, and to a lesser extent Androgel, which should continue to expand despite additional competition in the next few years. The company’s pipeline, particularly ABBV’s oral Hepatitis C regimen, will be determinant of success later in the decade. Analysts forecast 10% upside from current levels, and shares should trade towards the high-$30’s in the near-term.

AbbVie is a one-product company, but growing revenue should continue to drive value. For the time being, AbbVie is a one-trick pony. Sales of the auto-immune drug Humira are expected to come in at more than $9B in 2013, making up at least 50% of AbbVie’s estimated $18B revenue, and investors will remain focused on the drug until AbbVie’s pipeline begins to prove out in the next few years. Investors may proceed with caution considering competition from oral comparators like Pfizer’s (NYSE:PFE) Xeljanz, but as Xeljanz remains a second-line product in rheumatology, we don’t expect it to make a dent in Humira sales immediately; with its proven track record, physicians continue to utilize Humira before switching patients over to Pfizer’s oral drug. While Humira sales growth may slow in the next few years due to competition, sales aren’t expected to decline as the immense market for auto-immune drugs continues to expand at a 6% CAGR annually; from $32B in 2008, it’s expected to reach $48B in 2015. Analysts estimate sales of the drug will peak at over $12B in 2017. AbbVie’s additional products, like the segment-leading testosterone replacement therapy Androgel, will reman in the spotlight as well for AbbVie investors, and revenue should continue to grow until generics begin entering the market later in the decade.

As with all biotechs, product development will be crucial to future value. The above value drivers will be the focus of investors in the near-term as AbbVie progresses its pipeline, namely its all-oral Hepatitis C (HCV) franchise. AbbVie’s regimen should hit the market in 2015, just ahead of Gilead Sciences’ (NASDAQ:GILD) similar regimen. Although Gilead’s appears more convenient, and a number of competing oral regimens could displace AbbVie’s as market leader, AbbVie will nevertheless secure a lucrative portion of the HCV market due to its first-to-market advantage and product differentiation. Elagolix, an endometriosis treatment, and GLPG0634, a treatment for rheumatoid arthritis, are both expected to be top products for AbbVie as well when they reach the market in the next few years. Nevertheless, AbbVie’s pipeline is still far from producing revenue, and the company will need to demonstrate success in the clinic before investors shift focus from AbbVie’s already commercialized products to these new drugs in the next few years. Analyst average price targets of around $39, and revenues should peak at $20B by 2017 without products to replace Humira’s immense sales. The success of previous pharma spinoffs and growing revenues in the near-term, however, should drive ABBV gains in the next year.

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